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STARTING AND OPERATING A BUSINESS IN INDIANA Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Indiana has a fairly typical tax and legal structure under which businesses must operate. Until 2003, it had an unusually complex three-tiered approach to taxation of corporations, with a gross income tax, an adjusted gross income tax, and a supplemental corporate income tax, but its tax system was completely overhauled and simplified in 2003, with the repeal of the gross income tax and supplemental corporate income tax, along with concomitant increases in the sales tax rate and the adjusted gross income tax rate. In another pro-business move, Indiana began allowing a 100% deduction, for personal property tax purposes, of business inventories, beginning with assessments made in 2006 for property taxes due in 2007. Like most states, Indiana imposes income taxes, a franchise tax (but which applies to financial institutions only), sales and use taxes, and various excise taxes, with property taxes mostly imposed at the local level. The state has also adopted a limited liability company (LLC) law and limited liability partnership (LLP) law, so that businesses operating in Indiana in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. UPDATE NOTE: Indiana is an attractive place to start or operate a small business, due in large part to the low costs of doing business in the state. Indiana offers:
In 2007, the Indiana legislature took the important and business-friendly step of repealing the state's bulk sale law (Article 6 of the Uniform Commercial Code), so that purchasers of a business or the assets of a business in Indiana are no longer subject to the burdensome legal requirements of complying with the bulk sale law. Until very recently, the state's economy was fairly strong, in terms of the level of unemployment and other economic measures, but has drastically weakened in the last 12 months. For example, in February, 2008, the Indiana unemployment rate was only 5%, just slightly above the 4.8% national rate of unemployment for that month, but has since soared to 9.4% in February of 2009, well above the national rate of 8.1%. To view the latest federal Bureau of Labor Statistics unemployment rate data for Indiana or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Indiana can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company (LLC). In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Indiana also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Indiana can be established with no formalities. However, as discussed in Section IV(b), it will typically be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you will be selling tangible personal property at retail that is subject to sales tax, you will need to register and obtain a sales tax certificate for each place of business in Indiana, as discussed in Section IV(d). Also, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the county or counties where you do business, as discussed in Section IV(g). No separate tax form filing is required, generally, for a sole proprietorship, under the Indiana income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Indiana income tax and filing requirements for individuals. Doing business as a sole proprietor in Indiana is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. Also, unlike corporations and LLC's, sole proprietorships are not required to file biennial reports and fees with the secretary of state. (c) Partnerships. Indiana's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). Unlike corporations and LLC's, partnerships (general partnerships, limited partnerships, or limited liability partnerships) are not required to file biennial reports with the secretary of state or pay the associated fees. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income taxes or adjusted gross income tax in Indiana. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Indiana partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Indiana can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses as well. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts and who only risks the amount invested), may also be formed under Indiana law. Unlike a general partnership, a limited partnership must have a written partnership agreement. It must also file a certificate of limited partnership with the secretary of state, together with a filing fee of $90. Foreign limited partnerships must register with the secretary of state before being allowed to do business in Indiana, and must also pay a registration fee of $90. For more information on limited partnership filing requirements, see the contact information for the offices of the Indiana Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Indiana. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Indiana state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. A general partnership can achieve a significant degree of limited liability by simply registering the partnership with the state as an LLP. However, an LLP does not protect a partner from personal liability for the partner's own acts of omissions. To form an LLP in Indiana, you must file a registration form with the secretary of state and pay a filing fee of $90. A foreign LLP, one created under the laws of another state, must register also with the secretary of state and pay a fee of $90. The name of an LLP must contain the words "Limited Liability Partnership" or the abbreviation "L.L.P." or "LLP" as the last words or letters of the name. (The filing fees for LLP's are reduced to $75 if the documents are filed electronically.) LLP's are no longer required to file annual or biennial reports. Instead, they must file an amended registration and pay a $30 filing fee any time the information in their original registration changes. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Indiana, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Indiana, you must file articles of incorporation with the Indiana Secretary of State and pay a fee of $90. A foreign corporation (one that is formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Indiana, by filing an application for a certificate of authority and paying a filing fee of $90. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Indiana, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, or your foreign corporation has obtained a certificate of authority, it will be required to file biennial business entity reports on Form 48725 and pay a filing fee of $30 with each such report to the secretary of state if filing a paper report or by fax. (The filing fee is reduced to $20 if filing electronically.) Failure to file this report every two years on a timely basis could result in suspension or revocation of your corporation's charter. Professional corporations are no longer required to file annual reports with the Secretary of State, but now file biennial reports like other corporations. In addition to paying federal income taxes on its income, a corporation that does business in Indiana must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Indiana, see the contact information for the offices of the Indiana Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Indiana recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. That is, an S corporation is exempt from the Indiana adjusted gross income tax on corporate income, but generally must withhold state income tax on any Indiana-source income distributed or credited to nonresident shareholders. (f) Limited Liability Companies. Indiana, like every state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Indiana may also choose to operate in the form of an LLC. In most states, including Indiana, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under Indiana tax laws. To form an LLC under the laws of Indiana, one or more persons must file articles of organization with the Indiana Secretary of State, which must be accompanied by filing fees of $90. Foreign LLC's, those formed under the laws of another state, must register with the state before they may do business in Indiana, by filing an application form with the Indiana Secretary of State and paying a filing fee of $90. The filing fees for articles of incorporation or for registration for authority to do business in Indiana are reduced to $75 if the documents are filed electronically. Indiana's LLC law originally provided that domestic or foreign LLC's had to have at least two members, but that provision was repealed, retroactive to July 1, 1993. In addition to initial filing fees, every LLC, domestic or foreign, must subsequently file biennial business entity reports on Form 48725 and pay a biennial report filing fee of $30 with each such report, if filing on paper or by fax. The fee is reduced to $20 if filing electronically. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. While most states have repealed their bulk sales laws in recent years, Indiana had not, and it has been necessary to comply with the often time-consuming and expensive requirements of this law when purchasing assets of an existing business. Failure to do so could expose you to liability to any creditors of the seller who did not get paid off when the sale of the business occurred. However, in 2007, the Indiana legislature took the business-friendly step of repealing this onerous legal requirement. Thus, you no longer have to be concerned with this requirement if buying an existing business or making a bulk purchase of the assets of a business in Indiana. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Indiana, you should insist that the seller obtain an unemployment tax release from the Indiana Department of Workforce Development, to assure you that you need not withhold any such tax, or to advise you of the amount of such tax that you must withhold from the purchase price at closing. Contact the Indiana Department of Revenue to find out if you should withhold any other state taxes from the purchase price proceeds. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you may need to apply on a timely basis to the Indiana Department of Workforce Development, requesting that you be treated as a successor employer. Where the buyer and seller have substantially common ownership, management, or control, a transfer of the seller's experience rating is mandatory. Similarly, if the Department of Workforce Development determines that a business was acquired solely or primarily for the purpose of obtaining its low unemployment tax experience rating, a transfer of its experience rating will not be permitted. PLANNING POINT: EXAMPLE: Where a complete sale of a business occurs, the seller is required to file Form 46799, Report of Transfer -- Complete Sale, with the Department of Workforce Development, and the buyer will become a successor employer, succeeding to the seller's experience rating. Where you acquire only part of the seller's business and workforce, the seller is required to file Form 23299, Report of Transfer -- Partial Sale, and the seller has the option of deciding whether or not to transfer part of its experience balance (unemployment tax rate) to you. As the buyer, if you wish to be treated as a successor employer, you must file an application for an experience transfer with the Department of Workforce Development within 30 days after the transaction, or if sooner, 10 days after being notified by the Department that you are a successor employer. IV. INDIANA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Tax levels on businesses are generally quite low in Indiana.
The personal income tax (known as the adjusted gross income
tax) is imposed at a flat tax rate of only 3.4% (albeit with
very few deductions, other than for business expenses) and
there is no property tax on intangible property. There was
previously no general exemption of inventories from the
property tax in Indiana, unlike many other states, but
inventories are now assessed at 0% statewide, beginning
with the 2006 assessments for property taxes that were
first due and payable in 2007. In addition, new property
tax reform legislation in 2008 sets permanent caps on
property taxes, as a percentage of assessed value. The
maximum property tax rate on most business property
will be limited to 3% of assessed value, beginning in
2010 (2% on apartments and agricultural land).
On the other hand, the adjusted gross income tax on corporations
is now imposed at the relatively high rate of 8.5%, versus the 3.4%
rate that applied until 2003. Also, while the state income tax on
individuals is one of the lowest of any state that has an income
tax, county governments are permitted to also impose income taxes,
in addition to the state income tax, which is not the case in most
other states. County income tax rates range from 0% to as much
as 1.75% for residents.
For state tax forms and tax information, see the contact
information for the Indiana Department of Revenue in
Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some kind.
In most cases, this will be a local license, issued by your
city or county. Before you open your business, contact your
local city or county hall and find out if your particular
business needs one or more local licenses. Most kinds of
local business licenses are granted upon payment of a fee,
with no further requirements, except possibly for annual
or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning and
planning restrictions. If you own or rent any type of
facility, you will generally need fire department permits,
showing that you meet fire safety codes and any construction
or improvements to an existing structure will usually
require a building permit. If you intend to simply operate
your business from your home, you may be in violation of
local zoning requirements, but this is less likely to be a
concern if you don't have clients, customers, suppliers, or
employees coming to your house on business, on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Indiana has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
A company that has no employees and simply provides a
service (that is not subject to sales tax) may not need
to register. However, most businesses in Indiana will need
to register on Form BT-1, which will serve as
your registration for sales tax, withholding tax, food and
beverage tax, county innkeeper tax, motor vehicle rental excise
tax, tire fee, and prepaid sales tax on gasoline. A separate
application is required for each business location, and there
is a $25 non-refundable application fee for a sales tax permit
(Retail Merchants Certificate) or a $100 fee for the prepaid
sales tax on gasoline for qualified distributors.
Upon registering with the Indiana Department of Revenue,
your business will be assigned an Indiana Taxpayer Identification
Number, which must be included when filing Indiana tax returns or
remitting tax payments to the state. Form BT-1
will not serve as your registration as an employer for
the state unemployment tax -- see Section V(b)
regarding registration requirements for unemployment tax for
businesses that have employees.
For help with state licensing and business registration
requirements in Indiana, see the contact information for the
offices of the State Information Center listed in
Section VI(a).
(c) Income and Franchise Taxes.
Indiana has both a personal income tax and a corporate income
tax, but no general corporate franchise tax. The application
of state income taxes to each of the major types of legal
entities is discussed below in the following paragraphs.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Indiana individual income tax is imposed at a flat tax
rate of only 3.4%, on an individual's adjusted gross income
(AGI). AGI is essentially the same as your federal adjusted
gross income, which means that few deductions are allowed,
other than for business expenses. Most Indiana counties
also impose one or more of several types of local income
taxes, at rates that are generally lower on nonresidents
than on residents of such counties.
Individual taxpayers generally pay state income tax on
their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity, such
as a partnership, S corporation, or LLC. The Indiana
personal income tax return, Form IT-40,
must be filed on April 15th of each year, for calendar
year taxpayers, with the Indiana Department of Revenue.
Partnerships, or entities taxable as partnerships, such as
LLC's, are not subject to state income taxation in Indiana,
but must file an information return with the Department of
Revenue each year, showing each partner's share of taxable
income, losses, and credits, on Form IT-65.
Partnerships with nonresident partners are generally required
to withhold state income tax on the nonresidents' share of the
partnership's Indiana-source income, at the rate of 3.4% on
individual nonresidents or 8.5% on corporate partners (other
than S corporations) that are not qualified (registered) to
do business in Indiana. County income tax rates for 2008 can
be found at the following Internet URL:
www.in.gov/dor/reference/files/08-county-rates.pdf
No withholding is required for nonresident partners
who are residents of "reverse credit" states -- Arizona,
California, Oregon, and Washington D.C., if they are subject
to tax in those states and pay state income taxes at a
rate of at least 3.4%. However, withholding is required
in the case of a California resident who is included in a
composite return filed on behalf of the nonresident partners
of the partnership.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income from
the business, will generally be required to make advance
payments of estimated Indiana individual income taxes, if
their net tax liability (not covered by withholding) exceeds $400.
Estimated tax payments are due in four installments, due
on the same dates as federal estimated tax payments, the
15th day of the 4th, 6th, and 9th months of the taxable
year and the 15th day of the first month of the following
year. Payments are made with estimated tax voucher
Form ES-40.
The Indiana corporate income tax rate, on corporations
other than S corporations, was formerly a somewhat complex
3-layered set of taxes, consisting of an adjusted gross
income tax, a gross income tax, and a supplemental net
income tax. However, as of January 1, 2003, the gross
income tax and supplemental net income tax were repealed,
and the adjusted gross income tax rate was increased to
8.5%. There is no general franchise tax, although banks and
certain other financial institutions are subject to an 8.5%
franchise tax and utility companies are subject to a utility
receipts tax of 1.4% on taxable utility gross receipts.
The corporation adjusted gross income (AGI) tax is a tax on
federal taxable income in Indiana, with certain adjustments. For
example, no deduction is allowed for charitable contributions, state
income taxes, or the federal Domestic Production Activities deduction.
Quarterly estimated tax payments may be required, if the AGI tax
exceeds $1,000 a year or, for tax years beginning on or after
December 16, 2007, $2,500.
Corporate estimated tax payments, if required, must be
made quarterly, by the 20th day of the 4th, 6th, 9th and
12th months of the tax year. If an estimated tax account
needs to be established, contact the Department of Revenue
to remit the initial payment and to request preprinted
quarterly Form IT-6 payment voucher forms.
Submit Form E-6 to request the voucher forms.
Note that, effective on and after December 16, 2007, a
corporation that makes quarterly estimated payments of more
than $5,000 per quarter will be required to make such payments
by electronic funds transfer (EFT) or by delivering in person
or overnight by courier a payment by cashier's check, certified
check, or money order, on or before the date the tax is due.
The state corporation income tax return is Form IT-20,
which must be filed with the Indiana Department of Revenue
by the 15th day of the fourth month following the end of the
taxable year, or by April 15th in the case of a corporation
whose taxable year is the calendar year.
S corporations are generally recognized, as under federal tax
law, and are exempted from the corporate adjusted gross income tax,
if tax is withheld as required from payments to all nonresident
shareholders, on their share of the S corporation's Indiana-source
income. An S corporation that fails to comply with the withholding
requirement regarding nonresident shareholders will not actually
lose its tax exemption, but will incur substantial penalties
instead of tax. No withholding is required for nonresident
shareholders who are residents of "reverse credit" states --
Arizona, California, Oregon, and Washington D.C., if they are
subject to tax in those states and pay state income taxes at a
rate of at least 3.4%. However, withholding is required in the
case of a California resident who is included in a composite
return filed on behalf of the nonresident shareholders of the
S corporation.
Generally, there is no state tax on the income of an S
corporation at the corporate level (except on capital gains),
and as under federal tax law, the income is taxed to the
shareholders. S corporations file annual tax returns on
Form IT-20S.
TAXATION OF LIMITED LIABILITY COMPANIES
In Indiana, a limited liability company (LLC) is generally
taxed in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with a
corporation. Indiana follows the federal tax treatment of
LLC's, so that an LLC that is treated as a partnership for
federal tax purposes will be treated the same by Indiana,
and the same is true of a single-member LLC that is treated
as a "disregarded entity" (as a sole proprietorship, in
effect) for federal tax purposes.
Indiana law allows articles of organization to be filed
by one person and state law has been amended, retroactive
to 1993, to permit formation of one-owner LLC's, which now
also qualify for treatment as sole proprietorships for
federal and Indiana tax purposes.
Note that it is not always entirely clear whether an LLC is
a "single-member LLC" or not, where the "single owner" is a
married couple who hold the entire ownership of the LLC in some
form of co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, where a couple hold the LLC interest as
community property, ruling that the IRS will accept whatever choice
the couple make, either to disregard the LLC as an entity (treating
it as a "single-member LLC") or to treat it as a partnership between
the husband and wife.
However, Indiana is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Indiana would treat the LLC as a single-member
LLC or as a partnership.
While Indiana does not tax the income of an LLC that is treated
as a partnership, LLC's with nonresident members are generally
required to withhold state income tax on the nonresidents' share
of the LLC's Indiana-source income, in the same manner as is
required for partnerships with nonresident partners. See the
discussion of required withholding by partnerships above, in
this Section IV(c).
(d) Sales and Use Tax.
Indiana imposes a general sales tax on retail sales of tangible
personal property at the statewide rate of 7% (6% prior to April
1, 2008), with no local sales or use taxes imposed. However, a
number of counties have lodging taxes and some localities have
food and beverage taxes. There are also local taxes on admissions
to professional sports events, to finance stadiums and sports
facilities in specified counties. An additional sales tax of 4%
applies to rentals of passenger automobiles for periods of less
than 30 days.
The sales tax rate was increased from 6% to 7% on April 1, 2008
in order to fund permanent reductions in property taxes.
The Indiana sales tax generally applies only to transfers
of tangible personal property. With few exceptions, most
services are exempt from tax, except where there is also
a transfer of tangible personal property.
Retail merchants must register with the Indiana Department
of Revenue. A sales tax certificate must be obtained (and a
$25 fee paid) for each place of business in the state of Indiana.
Register on Form BT-1, which is also your
registration for income tax withholding, if you have employees,
and for miscellaneous other Indiana taxes. (It does not
serve as your registration as an employer for state unemployment
tax -- see Section V(b) regarding
registration requirements for unemployment tax.)
There are numerous exemptions from the sales tax, the
most important of which is the resale exemption. If you are
a wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer. In 2005, the Department of Revenue
released a new and revised ST-105 General Sales Tax
Exemption Certificate form, which consolidates
numerous other exemption forms into one multi-purpose
exemption form.
Another important exemption is allowed for custom computer
software, but not for pre-written ("canned") software.
Indiana has modified certain of its sales tax laws to
comply with the Streamlined Sales Tax Project and one such
important change is to make all delivery charges subject to
sales tax, whether or not the charges are separately stated.
Installation charges are also taxable, unless separately
stated.
Retailers who collect and pay over sales tax are allowed
to keep part of the amount collected, to compensate them
for the administrative costs of collecting and accounting
for the sales tax and filing sales tax returns. This amount
was previously 0.83% of the tax collected and timely paid.
Since July 1, 2007, the allowance is reduced for certain
large merchants. For retail merchants whose gross retail
sales and use tax liability was over $60,000 but not over
$600,000 for the state fiscal year ended June 30th of the
prior fiscal year, the allowance is reduced to 0.6% of the
tax. If the tax was over $600,000 for such period, the
allowance is reduced to 0.3%. The first payment reflecting
the reduced collection allowance was the August 20, 2007
sales tax payment.
Beginning July 1, 2008, the allowances were reduced
further, to 0.73% for merchants whose liability is
$60,000 or less; to 0.53% if collections are between
$60,000 and $600,000; and to 0.26% if over $600,000.
A shadow tax, the use tax, is also imposed at the same
rate as the sales tax. It is primarily intended to tax
property that is acquired from sources outside of the state,
in transactions not subject to sales tax, when such property
is used or consumed within Indiana. Use tax may also apply
to items purchased on an exempt basis, such as for resale,
if such items end up being used or consumed, instead of
being resold.
Effective January 1, 2008, large payers of sales and use
tax making more than $5,000 of sales and use tax payments
are required to make payment by electronic funds transfer
(EFT). The previous threshold for required EFT payments was
$10,000 of tax.
For more information on Indiana sales and use tax registration
and compliance, see contact information for the offices of the
Sales Tax Section of the Department of Revenue, in
Section VI(a).
(e) Real and Personal Property Taxes.
In Indiana, as in every other state, any business real estate you
own will be subject to real property taxes. In general, realty
is taxed on its assessed value, which is 100% of its true
tax value.
Indiana generally imposes personal property taxes on tangible
personal property and businesses are required to file annual
personal property tax returns. ("Personal property" is any kind of
property that is not real estate.) However, since January 1, 2003,
inventory has been exempted from personal property tax where the
inventory is altered into a new form and is to be shipped, or is
to be incorporated into personal property that will be shipped,
to a destination outside of Indiana. Otherwise, inventories have
been subject to property tax until recently, unless exempted by
the county where it is located.
Beginning with assessments made in 2006, for property taxes
first due and payable in 2007, business inventory is now generally
exempted from property tax statewide, in all Indiana counties.
The inventory must still be reported on the taxpayer's personal
property tax return but is to be deducted on the same form for
the ease of the taxpayer.
While Indiana generally taxes tangible personal property,
it does not impose a property tax on intangible personal
property, such as stocks, bonds, promissory notes, or other
such paper assets.
(f) Other Business Taxes.
Indiana imposes a number of excise and other taxes on businesses, including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name as a means of protecting against other companies usurping that particular trade name. Any business operating in Indiana under an assumed name must file an assumed name statement with the office of recorder of each county in which it operates. Corporations, LLC's and limited partnerships must file a copy of the assumed name certificate with the Indiana Secretary of State, and pay a $30 filing fee to the secretary of state. A sole proprietorship that operates under the true surname of the owner is not considered an assumed name, in Indiana. Similarly, a partnership name that includes the true surnames of some or all of its partners is not considered an assumed name. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Indiana imposes a state income tax on the income of individuals, you will also need to withhold Indiana income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Indiana Department of Revenue on Form BT-1, which can also serve as your sales and use tax registration for a seller's permit and for various other state taxes. It will not, however, serve as your employer registration for state unemployment tax -- see Section V(b) for Indiana unemployment tax registration requirements. Since many of Indiana's counties have adopted county income taxes, employers must also withhold county income taxes at varying rates. Each adopting county has a resident tax rate and a (lower) nonresident tax rate. An employee cannot be subject to both a resident rate and a nonresident rate at the same time. A person who resides in an adopting county on January 1st is subject to that county's resident rate for that year. If residing in a non-adopting county but working in an adopting county, the employee is subject to the nonresident tax rate in the county of his or her principal employment. For more information on Indiana income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Revenue, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees in each of 20 weeks during the current or preceding calendar year, you, as an employer, will be required to pay state unemployment tax based on some or all of the amount of such wages paid. Employers subject to the Indiana unemployment tax are required to register with the Unemployment Insurance Services division of the Indiana Department of Workforce Development, on Form 2837, Report To Determine Status, to obtain an employer identification number and begin receiving tax forms for unemployment tax purposes. New employers are required to pay tax at a rate of 2.7% in 2009 on the first $7,000 of wages paid to each employee. New employers will remain at this rate until they have:
This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Indiana law, cannot be charged to your employees or withheld from their wages. For more information on your Indiana unemployment tax obligations as an employer, see the contact information for the offices of the Department of Workforce Development, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Indiana, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee, nor is a member of a limited liability company, although any such persons may be able to elect coverage voluntarily. Licensed real estate professionals or independent contractors in the construction trades are also not considered to be employees and thus do not need to be covered by workers' compensation. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. You may obtain a copy of such a notice from the Workers' Compensation Board of Indiana. For more detailed information regarding your obligations as an employer under the Indiana workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Board of Indiana, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Indiana wage-hour laws, which provide for a state minimum hourly wage that is currently $6.55 an hour, the same as the federal minimum wage, which was increased on July 24, 2008 and will increase again to $7.25 on July 24, 2009. Indiana law also requires overtime pay at one and one-half times the regular rate of pay, for hours worked in excess of 40 hours a week. Indiana's minimum wage law applies to employers with two or more employees. Like the federal wage/hour law, it does not apply to bona fide executive or administrative employees or to outside salespersons. Employers subject to the Indiana minimum wage/hour laws must display a state wage/hour poster in the workplace, which can be obtained from the Indiana Department of Labor. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Indiana, which are generally more restrictive with regard to hours that may be worked for children 16 or 17 years old, and somewhat less restrictive than federal laws for children 14 or 15 years of age. Indiana law permits the employment of minors beginning at the age of 14. However, the law sets out specific requirements for such employment, including restrictions on the nature of the work performed and limitations on the hours worked by minors. Prior to employing a minor, an employer must have an employment certificate on file, issued by the proper issuing officer, at the location in which the minor is to be employed. Employment certificates are commonly referred to as "work permits." Employment of children under the age of 14 is generally prohibited, with only a few exceptions. Minors under the age of 14 may only be employed as a newspaper carrier, golf caddy, domestic service worker (work performed at a private residence), entertainer (within certain restrictions), or farm laborer (minors under 12 may only work at farm labor on a farm owned by the minor’s parents). There is no requirement that a minor obtain a work permit for these occupations if the work is not performed during hours in which the minor is required to be in school (7:30 a.m. to 3:30 p.m., generally). In addition, the work hour restrictions do not apply to these occupations. However, no minor may be employed in any occupation during hours in which the minor is required to be in school, unless a written exception is issued by the school that the minor attends. For any type of work other than as described above, work permits must be obtained in order to employ minors of the ages of 14, 15, 16, or 17, except for a minor who has graduated from high school or who has obtained a General Educational Development (GED) diploma (sometimes referred to as a Graduate Equivalent Diploma). Limitations on working hours of minors of age 14 or 15 are as follows:
Limitations on working hours of minors of age 16 are as follows:
Limitations on working hours of minors of age 17 are as follows:
Most Indiana employers must provide one or two breaks totaling 30 minutes to teens under the age of 18 who are scheduled to work six or more consecutive hours. The law exempts from this requirement: farm laborers, domestic service workers, golf caddies, newspaper carriers, teens that have completed an approved vocational or special education program, and teens that have withdrawn from school. All employers employing minors must post the Notice of Teen Worker Hour Restrictions. This form must be posted in a conspicuous place or in the area where notices to employees are normally posted. The form may be obtained from the Bureau of Child Labor, part of the Indiana Department of Labor. For required posters or for more information on Indiana's minimum wage, overtime or child labor laws, contact the Indiana Department of Labor at the address listed in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Indiana is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Indiana job safety requirements, you may wish to contact the Indiana Department of Labor (IOSHA), and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Department of Labor - IOSHA, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Indiana labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. Indiana law requires employers to pay wages on at least a semimonthly or biweekly basis, if requested. Payments must be made to an employee who terminates employment voluntarily or is discharged by the employer, no later than the next regular payday. A penalty of 10% per day, up to double the wages owed, must be paid to the terminated employee if payment is not made on time. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Indiana does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Indiana, and display a poster informing employees of their rights. Indiana law prohibits discrimination in employment on the basis of race, color, sex, disability, national origin, or ancestry. The Indiana discrimination law applies to employers with 6 or more employees in the state, generally. However, dismissal or refusal to hire a person on account of age is also prohibited, for persons between the ages of 40 and 70, and this law applies, regardless of the number of employees, to all private sector employers. For more information on the Indiana Civil Rights Act and your obligations as an employer, contact the Indiana Department of Labor, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Indiana New Hire Center, for Indiana employers) within 20 days after the date of hire. If filing electronically or magnetically, the reports must be submitted twice monthly, on dates not more than 16 days apart. Failure to report a new hire can result in a fine of up to $500. For more information, or the mailing address for new hire reports, see Section VI(a). To submit reports online via the Internet, see Section VI(c). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Indiana, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits. To obtain help with all regulatory and permitting requirements, see the address for the State Information Center, which is listed below under the STATE LICENSES heading. Also, the Indiana Economic Development Corporation (IEDC), a state agency, can assist businesses wishing to locate or relocate in the state with various permitting and other regulatory matters. Contact the IEDC at: Indiana Economic Development Corporation Addresses and other contact information for other key state and federal government agencies in Indiana, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact this office for information on:
Business Services Division TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Department of Revenue, which is the main tax collection agency in Indiana. Also register with this agency as an employer, for state income tax withholding purposes. Taxpayer Services Division STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Indiana Department of Labor STATE LICENSES. The following office has been established by the state of Indiana to help businesses starting up or relocating in the state with business regulations and permits. State Information Center STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Indiana sales and use tax law, from the Sales Tax Section of the Indiana Department of Revenue, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the Withholding Tax Section of the Indiana Department of Revenue, at the address listed above for that agency, to register as an employer, for purposes of Indiana income tax withholding. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Indiana Department of Workforce Development WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Workers' Compensation Board STATE OSHA PROGRAM. For required posters and information on federal and state occupational safety and health laws that affect you as an employer in Indiana, contact the IOSHA division of the Indiana Department of Labor, at the address listed above for that agency. NEW HIRE REPORTING. Report newly hired or rehired employees within 20 days to the following address (or report twice a month if filing electronically or magnetically): Indiana New Hire Reporting Center (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Indiana to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. The Indiana Chamber of Commerce administers the SBDC program in Indiana under contract with the Indiana Economic Development Council. Contact the lead office below for information, or for the location of other SBDCs nearer to you. SBDC Network Lead Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Indiana state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Indiana. Since new sites are appearing frequently, you might also want to search for other Indiana government Web sites by using one of the popular Internet search engines, such as Google, MSN, or Yahoo. To start your Internet search for Indiana government information, you may want to begin with the following Internet sites: Access Indiana (state home page for Indiana): State Information Center (info on doing business or steps for starting a business in Indiana): List of Internet connections to Indiana state government offices: Indiana Department of Revenue home page: Indiana New Hire Center (secure site, to report new hires online): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Indiana. Or, for information on larger project financing, contact the following state agency: Indiana Statewide Certified Development Corporation The address of the Indiana district office of the U.S. Small Business Administration is: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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